Macro Focus - April 2016
Bank of Japan: wait and see

• BoJ’s monetary policy stance unchanged for now
• Further easing is expected this summer
• BoJ will be forced to do more to avoid the deflation trap

BoJ surprised the markets again
Despite lowering its inflation and GDP forecasts again the Bank of Japan (BoJ) did not change its monetary policy this week. It decided to allow more time for its January’s decision of negative interest rates on deposits to have an impact on the economy. The Bank did, however, leave the door open for additional easing. Furthermore, it announced it would provide zero interest rate loans to areas impacted by the recent earthquakes. So far, the monetary policy has not worked. The Yen has strengthened substantially, hurting Japanese exporters and putting downward pressure on import prices, which is holding down inflation. Inflation reached new lows, and retail and industrial production numbers continued on a negative trend in March.

Additional stimulus from the Ministry of Finance
The Government will create an extra budget to address the economic damage caused by the deadly earthquakes in Kumamoto earlier this month. Kumamoto’s economy accounts for about 1.1% of Japan’s GDP. Prime Minister Abe wants to pass this budget before Upper House elections in July. The extra budget is said to include funds for housing, businesses and infrastructure. Weak data also suggests that the planned VAT hike in April 2017 could be postponed (decision is expected in May).

Whatever it takes
BOJ policymakers will likely debate the possibility of easing monetary policy further at the rate review in June or July, as recent gloomy data and the additional blow from the earthquakes threaten a moderate economic recovery. Furthermore, as the more expansionary stance does not seem to work we believe that BoJ will be forced to do more. The deposit rate could be cut further into negative territory or the asset purchase programme could be extended.

PDF BoJ Update: wait and see

For more information about this report, please contact Ms. Liis Elmik,, +372 888 7206.
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